Department for Education guarantee applies to academies outsourcing who wish to outsource services

The Minister for Schools recently announced an extension to the guarantee given by the Department for Education (“DfE”) to academy trusts in respect of Local Government Pension Scheme (“LGPS”) liabilities which may make it easier for academies who wish to outsource services like catering and cleaning.

Academy trusts are automatically employers in the LGPS and when they outsource services, they must ensure that the pensions of transferring employees who are in the LGPS are protected (academies are subject to the governments New Fair Deal policy).

The contractor will need to be admitted to the LGPS so that the transferred employees can continue their active membership of the scheme. Being an employer in a defined benefit pension scheme of course carries risks. The future cost of providing the promised pensions is uncertain and, at least to some extent, outside of the employer’s control. From the contractor’s point of view, greater certainty may be attractive and “pass-through” arrangements can give that. These arrangements reallocate risk from the contractor to the outsourcer and mean contractors can better understand what the cost of pension provision will be through the life of the contract.

Outsourcing also presents risks for LGPS Funds. The risk for them is that the employer will not be able to pay contributions which are due to the Fund. To mitigate the risk of default, admitted bodies can be required to have a bond (an insurance policy which pays out a certain amount in the event of employer insolvency) or guarantee. In 2013, the DfE put in place a guarantee so that administering authorities of LGPS Funds would see academy trusts as low risk employers.  In the event of an academy trust closing, the Fund would not be left with unfunded liabilities. If the academy trust could not pay, the DfE guarantee would ensure the Fund was not left out of pocket.

Pass-through arrangements could increase exposure under the guarantee and academy trusts had to obtain approval from the Education and Skills Funding Agency before agreeing them.  The government says the new policy means that approval will no longer be needed in the following circumstances:

• Employees eligible for LGPS who are working for the academy trust are transferred to a contractor or on future re-tenders as part of an outsourcing contract.
• Employees eligible for LGPS who were working for the local authority in a maintained school, then transferred to a contractor under TUPE, prior to the school becoming an academy, and where the outsourcing contract has passed to the academy trust following conversion to an academy.
• Employees eligible for LGPS who are working for the local authority, which is providing services to the academy trust under a contract, and the trust decides to outsource this contract to a third-party provider. Therefore, the employees transfer from the local authority to the new contractor.